Protecting Your Profit From Currency Turbulence

Protecting Your Profit From Currency Turbulence

When you’re running a product-based business, every dollar counts—especially when you're importing stock and paying suppliers in USD. Currency fluctuations can be the silent killer of profit margins, with small shifts in the exchange rate leading to unexpected cost increases that eat into your bottom line.

Imagine placing an order today, only to find that by the time you pay in five months, the Australian dollar has weakened, making your products more expensive before they even hit your shelves. 

So how can you safeguard your business from currency turbulence? Let’s break down how exchange rates impact your costs and, more importantly, how to protect your profit margins from unnecessary losses.

The Currency Exchange Rate & Why It Matters

When you buy products from overseas suppliers, you typically pay in US dollars (USD), even though your business operates in Australian dollars (AUD). The exchange rate tells you how much AUD you need to pay for each USD.

  • If 1 AUD = 0.70 USD, this means $1 AUD buys 70 US cents.
  • If 1 AUD = 0.65 USD, this means $1 AUD buys only 65 US cents (the AUD has weakened).

If the AUD weakens before you actually make your payment, your costs increase—even though the USD invoice amount remains the same!

Real-Life Example: How Currency Fluctuations Affect Costs

  • You place an order with a manufacturer today for $10,000 USD worth of stock.
  • Your supplier won’t manufacture the goods for five months—so you’ll only pay the invoice when the order is ready.
  • You initially calculate that this will cost $14,285 AUD, based on the exchange rate at the time (1 AUD = 0.70 USD).
  • However, by the time you need to pay in five months, the AUD has weakened to 1 AUD = 0.65 USD.

New Cost Calculation:

  • Now, 1 AUD only gets you 0.65 USD, meaning you need more AUD to get the same USD amount.
  • Instead of paying $14,285 AUD, you now need $15,385 AUD to cover the same $10,000 USD invoice.
  • That’s an extra $1,100 AUD you weren’t expecting!

Your costs have gone up without you even increasing your order quantity!

How This Affects Your Profit Margin

If you had already priced your product based on the original cost assumption, your profit margin shrinks because your product now costs more to manufacture.

  • If you can’t pass the extra cost onto your customers, you absorb the loss in your margin.
  • If you increase your retail price, customers might buy less, affecting your sales.

If your business relies on importing stock, these fluctuations can make a big difference to your bottom line.

What If the AUD Strengthens Instead? (Good News!)

If the AUD goes up against the USD (e.g., 1 AUD = 0.75 USD), then your costs in AUD actually decrease.

  • Your $10,000 USD order now only costs $13,333 AUD instead of $14,285 AUD.
  • This means you save money and your profit margin increases—without changing your retail prices!

How to Protect Your Business from Currency Risks

Because you can’t predict the exchange rate five months in advance, here’s how businesses minimise risk and keep profit margins stable:

1. Forward Contracts (Best for Predictability)

  • You lock in today’s exchange rate with a bank or currency provider for a future payment.
  • This guarantees that no matter what happens to the AUD/USD, you will pay the same AUD amount.

2. FX Options (Best for Flexibility)

  • This allows you to set a worst-case exchange rate but still benefit if the AUD strengthens.
  • It’s like insurance against big currency losses.

3. Build a Pricing Buffer

  • If you suspect the AUD might weaken, you can slightly increase your retail prices to absorb potential extra costs.

4. Pay Early (If Possible)

  • If the AUD is strong now and you have the cash flow, pay in advance to lock in the lower cost.

Ensure a Smooth Landing & Protect Your Profits from Currency Turbulence

If you import stock and pay in USD, currency fluctuations directly impact your costs and profit margins. A weaker AUD means higher costs, while a stronger AUD reduces costs.

By using forward contracts, hedging strategies, or pricing buffers, you can stabilise your costs and avoid nasty surprises when it’s time to pay your supplier.

With grace and determination.

Felicity xx

The SheEO


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